Is Apollo Hospitals Enterprise (NSE:APOLLOHOSP) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Apollo Hospitals Enterprise

What Is Apollo Hospitals Enterprise's Net Debt?

As you can see below, Apollo Hospitals Enterprise had ₹42.4b of debt at September 2021, down from ₹49.7b a year prior. However, it does have ₹15.1b in cash offsetting this, leading to net debt of about ₹27.3b.

How Healthy Is Apollo Hospitals Enterprise's Balance Sheet?

The latest balance sheet data shows that Apollo Hospitals Enterprise had liabilities of ₹26.5b due within a year, and liabilities of ₹47.4b falling due after that. On the other hand, it had cash of ₹15.1b and ₹20.8b worth of receivables due within a year. So its liabilities total ₹38.0b more than the combination of its cash and short-term receivables.

Of course, Apollo Hospitals Enterprise has a market capitalization of ₹697.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Looking at its net debt to EBITDA of 1.4 and interest cover of 4.9 times, it seems to us that Apollo Hospitals Enterprise is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Pleasingly, Apollo Hospitals Enterprise is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 206% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Apollo Hospitals Enterprise's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Apollo Hospitals Enterprise generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Apollo Hospitals Enterprise's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. We would also note that Healthcare industry companies like Apollo Hospitals Enterprise commonly do use debt without problems. Considering this range of factors, it seems to us that Apollo Hospitals Enterprise is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Apollo Hospitals Enterprise that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.